Socioeconomic Inequality in Chile

December 22, 2010

For the past generation, Chile has been graced with the most stable democracy and economy in South America. Chileans boast some of the highest standards of living in Latin America, a fully functioning democracy, and one of the least corrupt and most efficient governments in the region. Nevertheless, in spite of the rapid expansion of civil and political rights since the country’s democratic transition in 1990, the presence of resolute and efficient institutions, and prolonged economic growth, socioeconomic inequality still abounds, a problem attributable to previous regimes’ failure to guarantee equal social services to all strata of society.

Inequality in Latin America is a social ill stemming from colonialism. During the colonial era, royal monopolies dominated the economic landscape, accumulating vast amounts of wealth in few hands and creating a wide gulf between the ruling class and the working class. This pattern of dual societies persisted long after independence and frequently generated social pressures that undermined the stability necessary to sustain a prosperous, modern-day, working democracy.

Chile is no exception to this pattern. In the 1960s and 1970s, the duality that afflicted the country generated great pressures for redistribution that were met with resistance by more affluent groups. When the Socialist Salvador Allende was elected as president in 1970, he swiftly moved to enact redistributive policies and to nationalize and collectivize many sectors of the economy to tackle inequality. These efforts eventually led to economic chaos, in part because of the bad implementation of the measures themselves, but also because of covert interventions by the US Central Intelligence Agency (CIA) through the infamous Operation Condor. As declassified documents relating to the coup in Chile note, US President Richard Nixon ordered the CIA to “make the economy scream.” As the economy continued to plunge, elite and right wing leaning groups demanded an end to this downslide, while poor and left wing groups demanded stronger actions by President Allende. On September 11, 1973 the Chilean military bombarded the presidential palace, initiating the Pinochet dictatorship.

During the dictatorship of General Augusto Pinochet, the structure of the Chilean economy was radically altered and the basis for its current economic model was set in place. Immediately following the military the coup, Chile’s economy continued to struggle, so the military junta appointed a group of Chilean economists who had graduated from the University of Chicago to overhaul the country’s economy. Pinochet’s team of expert economists, “the Chicago Boys,” made Chile into one of the world’s most extreme experiments in neo-liberalism. They implemented tight monetary policies to tackle inflation, deregulated the economy, virtually abolished tariffs and other forms of trade barriers, and shifted the economy toward an export-based model. But what truly made these neoliberal policies stand out was their implementation in areas of social spending that had generally been considered the state’s responsibility: the privatization of healthcare, higher education, and the pension system.

The reforms initially did not have the expected results. In 1982 the Chilean economy collapsed, partly because of a region-wide debt crisis, but also because a total lack of regulation led to the collapse of the banking sector. Unemployment soared above 20 percent, while real wages fell and even more cuts were made to government spending on social services. Only after Finance Minister Hernan Buchi made key reforms did the economy recover, hitting its highest-ever annual growth rate in 1989.

In 1990 Chile finally returned to democracy. The Concertación de Partidos por la Democracia (Concertación), a bloc of center-left parties, assumed power with Patricio Aylwin, the first elected president since Allende, as their leader. The Aylwin government decided to continue the market based model established by the Pinochet regime, but to add more social protection to curb the effects of a purely neoliberal model. Since the democratic transition, Chile has experienced the highest average growth rate in its history, while increasing social spending and fully expanding civil and political rights to its citizens. Chile has thus been governed by moderate leaders who have learned to avoid the populist and extremist tendencies of other leaders throughout the region.

Despite this good governance, Chile has faced a paradox of economic growth coupled with persistent inequality that can be traced to social services of variable quality. Despite the expansion of coverage by social services over the last generation, the quality of services still varies by socioeconomic status. Without greater redistributive actions by the Chilean government, inequality will likely persist.

The duality of Chile’s social services is most evident in its education and healthcare systems. The quality of primary and secondary education still depends on socioeconomic status. A good family name is essential for admission to some of the more elitist academies, whose high tuitions effectively exclude the poor. Higher education has seen better results as the expansion of private universities has generated competition and increased scholarships for talented students. To nurture academic talent, however, a student still needs a quality primary and secondary education, and access to scholarships is much more limited at this level. Similarly, in the realm of healthcare, Chile has high-quality technology and healthcare providers, but access to these services is effectively limited to the rich. Chile’s Fondo Nacional de Salud (FONASA) provides poorer sectors of society with access to cheap healthcare, which is inferior to private healthcare plans. Long lines, flawed standards medical care, and gross inefficiencies all characterize this system. Moreover, only a select group of diseases are fully covered by this healthcare plan, rendering this system far truly universal. By contract, private clinics, such as the Clínica Alemana, are some of the best in the region, but only beneficiaries of the Instituciones de Salud Provisional, private healthcare insurers that charge higher fees than FONASA, can afford treatment in these facilities.

The results of other government initiatives have been similarly mixed. The privatization of the pension system, for example, has helped deter government use of retirement funds, a major problem in Argentina, among other countries. The total dependency of the pension system on the private market, however, has left retirement funds vulnerable to market fluctuations. Unemployment has decreased from its high point of 30 percent during the Pinochet era, but still remains close to 10 percent. The targeted social spending programs of the Pinochet era, which are still in use, have successfully reduced the worst cases of poverty, setting Chile apart from other Latin American countries, but could still stand improvement. According to a recent survey by the Encuesta de Caracterización Socieconómica Nacional (CASEN), the poverty rate has increased from 13.7 percent in 2006 to 15.1 percent in 2009. Though CASEN used a new technique to measure poverty in the 2009 survey, it is indisputable that poverty is still a reality in modern day Chile, existing side by side with the economic miracles the country has witnessed in the last two decades.

If the Chilean government wishes to correct this paradox of economic growth coupled with persistent inequality it must improve its current systems of public education and healthcare, the bedrock of social services. Primary and secondary public education are doomed to mediocrity indefinitely unless the government increases the resources available to these schools for improving teaching quality and expands the services and facilities offered to public school students. Concerning healthcare, expanding the diseases covered by FONASA would be a good first step until the government can gather the resources to fund a truly universal healthcare system.

Neither of these initiatives will be possible without increased tax revenue, most likely coming from a corporate system that has faced consistently low taxes. The conservative credentials of President Sebastián Piñera may facilitate a Nixon in China syndrome; the current administration has the political capital to implement reforms and initiatives that previous regimes could never have executed without unsettling investors in the Chilean economy. The Piñera government has already given some signs of possibly following this path by increasing certain taxes to fund reconstruction efforts following the February 2010 earthquake.

Chile’s economic restructuring has brought it to the regional forefront in terms of development and has made it into a model for economic competitiveness and market-based reforms. Nevertheless, market failures will always occur, and the Chilean government has to acquire the political will necessary to address the duality in its social services if it seriously aims to provide a durable social safety net. With luck, the recent earthquake and the election of a new government coalition will spur the creativity and political effort necessary to guarantee long-term social and economic stability.